AN ANALYSIS OF THE EFFECTS OF INFLATION AND EXCHANGE RATE ON THE COST OF LIVING IN NIGERIA

  • : Ms Word Format
  • : 75 Pages
  • : ₦5,000
  • : 1-5 Chapters
  •  
  • Click to DOWNLOAD Materials

AN ANALYSIS OF THE EFFECTS OF INFLATION AND EXCHANGE RATE ON THE COST OF LIVING IN NIGERIA

 

CHAPTER ONE

INTRODUCTION

1.1  Background of Study

Maintaining price stability and growth together in an economy is one of the central macroeconomic policy objectives of most developing countries in the world today. In order to promote economic growth and strengthen the purchasing power of the domestic currency for the Nigerian economy, emphasis has been laid by the Central Bank of Nigeria on maintaining stability in prices through the use of expansionary or contractionary monetary policy, (Umaru A. &Zubairu A. A., 2012). One of the financial problems experienced by Argentina, Brazil, Bolivia, Africa and Latin America amidst others is inflation Deo Gregorio (1992). In general, inflation can be defined as the rise in the level of prices maintained over a given period in an economy. In other words, it refers to the general rise in the price of various goods or services thus leading to a fall in the purchasing power of a countries currency, (Lipsey R.G. & Chrystal K.A., 1995). Inflation is an economic situation and it occurs where an increase in the supply of money is greater than the amount of goods and services produced in a country, (Piana V, 2002). Inflation is categorized into various degrees and they are as follows: hyperinflation (3 digits % points), extremely high inflation (50 % to 100%), chronic inflation (15% to 30%), high inflation (30% to 50%), moderate inflation (5% to 25%-30%) and low inflation (1%-2% to 5%), (Umaru A. &Zubairu A. A., 2012). An economy where the purchasing power of money is expected to retain acceptable value, low level of Inflation is beneficial for consumers and businesses to make long term plans. A low inflation rate leads to lower nominal and real interest rate that in turn reduces the cost of borrowing. An economy where inflation is low, “households” will be encouraged to purchase more goods that are durable and increase the rate at which they invest. This will lead to an increase in productivity and mass production of goods and services thus boosting economic growth. Inflation at a low level is necessary for economic growth, (Hossain E, Ghosh B.C, &K.Islam, 2012). A situation whereby inflation is on a high level is harmful to the economy because a high inflation rate has negative effects on the economic performance of general activities. High rate of inflation makes firms and households channel their resources from activities that are productive to other nonproductive activities to enable them reduce the burden of bearing inflation tax. Because of this, there is a high risk of losing money due to variability of relative prices leading also to a high chance of windfall gains. (Leijonhufvud A, 1977) is of the opinion that high inflation makes financial authorities use different instruments such as the fiscal and monetary policies to protect their financial assets from inflationary erosion. High inflation leads to a decline for labour available, thus leading to a decrease in production and in turn low growth. Zero inflation is not also encouraged in an economy because it is equally unsafe and harmful, it makes an economy stagnant (That is a period where economic growth increases at a very slow rate and is usually characterized by unemployment) in the economy.

Inflation in Nigeria can be traced to the “Cheap Money Policy” which started in 1960. It was a monetary policy used by the government to encourage development of key sectors in the economy after the country got her independence. It was characterized by reductions in interest rate which was targeted towards certain sectors in the Nigerian economy. This policy was implemented to aid the execution of the first national development plan and later the prosecution of the civil war. This led to increased monetary expansion with the narrow and broad measures of money stock increasing at annual rates of 29.7% in 1961 and 44% in 1969.Consequently, inflation rose from 6.4% in 1961 to 12.1% in 1969, (Bayo, 2005). There was a boom in oil revenue of the country in 1970, this led to a rise in government expenditure and aggregate demand without a accompanying increase in the amount of goods and services produced domestically, thus leading to an increase in the amount of money in circulation. Monetization of oil revenue is also a factor that expanded money supply which also resulted in a rise in the general level of prices in Nigeria, (Oriavwote V. E. & Samuel J. E, 2012).

There is no clear decision on the relationship between economic growth and inflation. Different studies have been carried out on inflation and economic growth and results generated from conducted research states different views and opinions to the relationship existing between inflation and growth. (Mallik G. & Chowdhury A., 2001) are of the opinion that there is a positive relationship between inflation and growth, (Fisher, S, 1993) believes that there is a negative relationship between inflation and growth, (Sidrauski M , 1967) believes that there is no relationship whatsoever between inflation and growth, while (Umair M. & Raza U.) found out that high rate of  inflation does not directly affect growth, they believe that inflation leads to high unemployment which in turn affects economic growth in the country.

  • Statement of the Problem

The Nigerian economy has remained underdeveloped for a long period despite being blessed richly with huge human and natural resources.The cost of living in Nigeria is becoming expensive especially for the low income earners. The   high cost has been attributed to rising inflation, exchange rate, high energy costs, exorbitant prices of food, transport and other basic commodities. As the prices continue to rise, it is evident that wages   have remained largely stagnant. It is worth noting that Nigeria operates a minimum wage legislation that dates back to colonial period. The general wages for the unskilled worker in the agricultural sector currently remains at N13,347 per month which is far below for the cost of living. The minimum wage for general workers such as cleaners, house servants, and watchmen among other categories stands at N 18,000 (The Standard, 2011). The wage is not enough to meet the basic needs especially in a city like Abuja considering the high cost of basic commodities.  Prices of basic commodities have been shooting upwards thus becoming unaffordable to many people especially the middle and low class earners. Prices of commodities purchased by low income workers are higher as they purchase in small quantities from low level outlets.

The weakening of the Naira against the United States of America dollar resulted to   high cost of fuel hence making production and transportation costs to escalate. In the month of September and October 2018, the Naira was trading at N 360 against the 1US dollar. The Nigerian economy relies more on imports especially for products like fuel. The fuel is purchased in dollars thus a weaker Naira implies a higher price in purchasing the commodity. The high cost of fuel, weaker Naira and inflation are to blame for the many economic woes Nigerians have been experiencing (The Standard, 2011).

Culturally, men are expected to be the providers in the house but on the contrary, the underclass low-income earners being the sole bread winners are likely to bear the heavy financial weight on their shoulders.  The underclass, are people who are at the bottom of a society having become victims of poverty trap. This class is largely composed of the young unemployed, long-unemployed, chronically sick, disabled old, or single-parent (usually the mother) families. It also includes those who are systematically excluded from participating in economic activities, such as cultural, ethnic, or religious minorities or illegal immigrants. Children of the underclass especially those from single-parent families often lack educational qualifications and social and other skills and are therefore, unable to rise out of it. Low-income eaerners who are casual employees, school dropouts, orphaned and house helps, unlike married women who get assistance from their husbands, have to strain to make ends meet. They have to pay for house rent, electricity, water bills, school fees, food and transport on their own. Although the low-income earners earn their income at the end of the month, the earnings from their wages are likely not to be enough to cater for their household needs. The level of expenditure is so high compared to their disposable income. This is so because of the high cost of living due to inflation and a weaker Naira.

Despite the Central Bank of Nigeria enacting macroeconomic policies to tame inflation, the Naira still remains weak against the US dollar. The wages have not been raised and it is likely that the low-income earners are trapped in a debt cycle. Therefore the need to investigate the   impact of inflation and exchange rates on standards of living among underclass low-income earners in Nigeria. My goal was to assess how their current cost of living had been affected by inflation, exchange rates, identify social economic challenges, as well as identify the livelihood strategies the low-income earners had adapted to cope with the high cost of living.

 

1.3  Research Questions

The main research question for the study was: What is the impact of inflation on living standards among low-income earners in Nigeria?

Specifically, the study addressed the following research questions:

  • How has the low-income earners’ current economic status been affected by inflation?
  • How has the low-income earners’ current economic status been affected by exchange rate?
  • What are the social economic challenges faced by low-income earners in the study area?
  • What are the livelihood strategies used by low-income earners in the area?

1.4 Broad Objective

To assess the impact of inflation on living standards among underclass low-income earners in Nigeria.

1.4.1 Specific Objectives

  • To assess how the low-income earners’ current economic status has been affected by inflation.
  • To assess how the low-income earners’ current economic status has been affected by exchange rate.
  • To identify social economic challenges faced by low-income earners in the study area.
  • To assess the livelihood strategies among low-income earners in the area.

1.5 Scope of the Study

The research was carried out in Nigeria. The study targeted underclass low-income earners in the country. This was so because low-income earners are the most vulnerable especially because they do not have husbands to help them out in sharing the heavy financial burden due to the high cost of living and the steadily rising prices. Unlike married women who get assistance in paying for house rent, electricity, school fees or medical bills, the low-income earners are the sole bread winners and are likely to struggle in making the ends meet due to the harsh economic times and biting prices. The researcher assessed how their current economic status for the past two years (2010 – 2011) had been affected by inflation and social economic challenges faced by the low-income earners.

The researcher also assessed the livelihood strategies the low-income earners used. The study aimed at assessing social economic challenges by focusing on underclass low-income earners who were school dropouts, casual laborers, house helps, and the orphaned girls. The study assessed the size of the household, education level, employment, income generating activities they engaged in, ability to afford basic commodities like food, shelter, health care as well as transport and pleasure in a given period of time. The type of houses low-income earners lived in, the schools their children attended, the hospitals they sought medical care, mode of transport as well as the average household budget and disposable income. This information helped the researcher to identify the social economic challenges faced by low-income earners as a result of inflation/exchange rate and high cost of living. The information was useful in providing insights on survival strategies.

1.6 Justification of the Study.

The findings will help the government towards achievement of Millennium Development Goals (MDG 1), which is eradicating absolute poverty, hunger and malnutrition and (MDG 3) to promote gender equality and empower women.

The study will help the government, Non-Governmental Organizations and donors to formulate, design policies, strategies and enact laws that can alleviate food insecurity and maintain household food security enabling other affected areas to solve the problem of food insecurity and living conditions among the low-income earners. The findings will also provide useful information that can be used to empower more low-income earners. With empowerment, they will be able to identify new opportunities they can venture into thus increasing their income and therefore cushioning them from the harsh economic times. The findings will also be useful to the Central Bank of Nigeria, because it can enact appropriate macroeconomic policies in time to tame high inflation thus protect household from extreme harmful effects of high inflation and weakening Naira against the United States Dollar. This is so because the dollar is used in carrying out most international transactions especially in importation of commodities like oil or foodstuffs. A weaker Naira and high inflation while the households income remains the same, does not augur well  for a country and its citizens because they spend more and save less and less for investment.

 

1.7 Limitations of the Study.

The roads to the remote areas were in a poor state thus long distances were covered on foot.

1.7.1 Delimitations

Although the study dealt with the underclass low-income earners, there were married people having similar problems.

 

AN ANALYSIS OF THE EFFECTS OF INFLATION AND EXCHANGE RATE ON THE COST OF LIVING IN NIGERIA

 

 

Leave a Reply